Borrowing to Invest - Should I? Shouldn't I?
By Alex G Ward
The ideas and dreams that come with the thought of investing can be almost intoxicating for some. It's entirely understandable; who doesn't like the idea of sitting back and watching your bank account swell with minimal effort on your part?
While investing your money and making it work for you is a wonderful initiative if executed correctly, there are an increasing number of people who are opting to borrow an initial lump sum of money from a financial institution in order to kick start their dream portfolio.
This may sound like a wise strategy (once you hit a few prize stocks you'll pay that debt back in no time, right?,) but when you delve a little deeper you'll find that borrowing to invest is more often than not the best way to start off on the wrong foot.
Borrowing money to invest is commonly referred to as 'gearing' and isn't necessarily a practice we believe is overly wise. When you stack up risk vs. reward, it's very rare that 'gearing' sees you finishing up in the latter category.
Would you consider venturing down to your local bank, filling out the forms, taking a loan for say, $10,000 and then heading straight to the casino to put it all on a hand of poker? No? Not even after you've read book after book after book on Texas Hold 'Em?
The vast majority of readers out there would have instantly thought, 'no way!' So, if you're not prepared to put yourself in debt to risk it on a gamble, what is the real difference between that and say, the stock market?
Both can boast dizzyingly high payoffs whilst also presenting the very real risk of you losing some or all of your money.
While this analogy may seem a little rich for some, we believe it carries behind it a fair amount of common sense.
While we gladly acknowledge that gambling and investing are entirely different beasts, in our opinion they do have one, very important phrase in common: 'only spend what you can afford to lose.'
This is certainly a topic that is ripe for debate however we believe that there is never a reason to put yourself in debt in order to begin investing. It's counterproductive and if you find yourself struggling with the idea, think about what would happen in the worst case scenario; if that initial investment was lost, could you survive financially?
If the answer is 'no,' then you don't need to give up your investment dreams, just go back to the drawing board, speak to a financial adviser and go about setting some financial goals that, at this particular stage of your life, are most realistic to your current circumstances.
Investing should never feel like a gamble.
While investing your money and making it work for you is a wonderful initiative if executed correctly, there are an increasing number of people who are opting to borrow an initial lump sum of money from a financial institution in order to kick start their dream portfolio.
This may sound like a wise strategy (once you hit a few prize stocks you'll pay that debt back in no time, right?,) but when you delve a little deeper you'll find that borrowing to invest is more often than not the best way to start off on the wrong foot.
Borrowing money to invest is commonly referred to as 'gearing' and isn't necessarily a practice we believe is overly wise. When you stack up risk vs. reward, it's very rare that 'gearing' sees you finishing up in the latter category.
Would you consider venturing down to your local bank, filling out the forms, taking a loan for say, $10,000 and then heading straight to the casino to put it all on a hand of poker? No? Not even after you've read book after book after book on Texas Hold 'Em?
The vast majority of readers out there would have instantly thought, 'no way!' So, if you're not prepared to put yourself in debt to risk it on a gamble, what is the real difference between that and say, the stock market?
Both can boast dizzyingly high payoffs whilst also presenting the very real risk of you losing some or all of your money.
While this analogy may seem a little rich for some, we believe it carries behind it a fair amount of common sense.
While we gladly acknowledge that gambling and investing are entirely different beasts, in our opinion they do have one, very important phrase in common: 'only spend what you can afford to lose.'
This is certainly a topic that is ripe for debate however we believe that there is never a reason to put yourself in debt in order to begin investing. It's counterproductive and if you find yourself struggling with the idea, think about what would happen in the worst case scenario; if that initial investment was lost, could you survive financially?
If the answer is 'no,' then you don't need to give up your investment dreams, just go back to the drawing board, speak to a financial adviser and go about setting some financial goals that, at this particular stage of your life, are most realistic to your current circumstances.
Investing should never feel like a gamble.
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